Arbitrage Magazine - August 2020 - Finance & Investment Club | IIM Rohtak

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AUGUST 2020 Vol 4 Issue 6

Our best read- IPO Investment: Blanket Strategy

Special Mentions: 1) The Great Divide 2) Recent Demand Slump in Indian Economy: Temporary Slowdown or Bigger Worry?

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INDEX

S.No.

Article

Page No.

1

IPO Investment: Blanket Strategy

3

2

The Great Divide

8

3

Recent Demand Slump in Indian Economy: Temporary Slowdown or Bigger Worry?

10

4

Trade Wars, Protectionism & Fate of Global Economy

15

5

Certainly Uncertain- Need of a New Capital

18

6

TReDS – An alternative source of finance for Micro, Small & Medium Enterprises in India

21

7

Youth Unemployment in India: A Grave Concern

25

8

Effects of COVID-19 on Gig Workers

29

9

India’s Journey to a Global Manufacturing Hub

34

10

Impact of Fiscal Government Policy for MSME on Economy

38

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IPO Investment: Blanket Strategy By: Aayush Saraogi (TAPMI) Introduction IPO’s are great source of money for the offering company. However, over the years retail investors have been increasingly investing in IPOs, thus deriving a strategy becomes important in the given scenario. When a private firm goes public the process is usually managed by investment banks or underwriters. Usually a syndicate is formed of multiple underwriters for large IPOs. Most IPOs are backed by an investment banking underwriting guarantee, where the investment banker guarantees the offering price in return for an underwriting fee. This guarantee makes the whole setting of offer price more interesting and gives way for an investment strategy for the retail investors.

IPO mechanism The Indian regulatory setting governing IPOs have at least three unique features which makes way for a blanket IPO investing strategy. They are: 1. The IPO upper price (MAXP) of the price band of an IPO cannot exceed 120% of the lower limit (L).

2. The predetermined quota of shares to three different investor categories post the book building phase: 50% to qualified institutional investors (QIBs), 15% to high-net-worth non-institutional investors (NIIs) and 35% to retail individual investors (RIIs).

3. Transparency of information production during the book building phase. Investors can publicly observe the subscription pattern for different investor categories for their respective portions, on a real time basis.

Indian IPO Process Though the book building process was existent in India since 1999, the Securities and Exchange Board of India (SEBI) introduced major policy changes post 2005. As part of the book building process, the issuing firm selects its investment banker(s), also known as the Book Running Lead Manager, to underwrite its IPO. The bookrunner carries out preliminary pricing of the firm and conducts numerous road shows and other preIPO advertising activities, along with the issuer firm. At this stage the price band is not disclosed. Subsequent to the road shows, the bookrunner in co-ordination with the syndicate of underwriters determines a price band and files a red herring prospectus (RHP) with the regulator. According to the Indian regulation, the price band has a lower and upper limit [L, MAXP], and the maximum permissible price for the upper limit (MAXP) is 20% higher than the lower limit. However, the bookrunner and its syndicate are permitted to set the offer price band as [L, MAXA], where MAXA could be equal to or less than MAXP. The RHP is distributed to investors, following which the book building process begins and investors submit bids with prices falling within the

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price band [L, MAXA]. After the book has been built, the issuing firm in consultation with the bookrunner, determines the final offer price for the IPO and allocates the shares to the investors in the primary market.

In the case of oversubscription by investors in any category, the allocation is made by means of a lottery in that particular category. Further, underwriters can re-allocate shares that are not subscribed by any investor category to categories which have been over-subscribed. Therefore, in case of Indian IPOs, retail investors do not compete directly with informed institutional investors, thus eliminating the problem of being crowded out by informed investors in good offerings.

Returns on the IPO offering date

1st day returns or traditional underpricing is defined as the % difference between the offer price and 1st day closing price. From the year 2010-2019 there have been a total of 258 IPOs across all sectors except for financial services and utility. 194 of the IPOs (75%) have given an average 1st day return close to 10%.

However, 32% of the total IPOs issued were over-priced providing a negative return on 15%.

Another interesting anomaly is that the 1 week returns and 30 days returns post the IPO process are similar to the 1st day returns. This indicates that majority of the gains happens on the 1st day itself.

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Underpricing vs investor subscription

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The above graphs indicate that retail investors are followers of QIB. QIBs oversubscribed 165 of IPOs and RIIs oversubscribed 188 of the IPOs. Moreover, underpricing or the 1st day returns are higher (close to 13%) with the presence of anchor investors and QIB oversubscription. Another critical point to not is that the 30 day returns with the presence of anchor investors is close to 13% compared to 9% of non-anchor investor IPOs. The blanket strategy The underpricing of IPOs, on average seems to offer an investment opportunity to retail investors.

However, there are three problems with this strategy: 1. Selection bias: As discussed in the regulatory part, when the IPO is oversubscribed, a lottery system is followed, and hence complete allotment or allotment of any sort is not always possible. Accordingly, with undersubscribed IPOs full allotment will be received.

Therefore, this would create overweight on the undersubscribed IPOs and underweight on the oversubscribed IPOs, thus wiping of the returns completely.

2. Hot & cold cycles: If the entire strategy is built on IPO investing, during periods of cold cycle, there may not be much investment opportunity available.

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3. Returns are not evenly distributed: There is a high amount of variability in the 1st days returns of the IPOs over the years. Therefore, timing becomes an important criterion for IPO investing as well.

Factors to consider for the blanket strategy 1. Selection of right IPOs: Identification of underpriced IPOs is the key. Since QIBs and anchor investors are better placed while evaluating an IPO, it makes sense to follow them accompanied by self-research. The Indian regulatory system allows to publicly view the demand of all the investors on a real time basis. The data gets updated on the stock exchanged every half an hour.

2. Allotment is the key: Once the underpriced IPO is figured out, bid for more shares in the company. Along with that, bid for fewer shares in the IPOs which are overpriced or priced close to the fair value.

3. Timing: Since most of the returns are on the 1st day of listing, gauging the market sentiment becomes important. This is important because shift in market mood might result into a large allotment of overpriced shares in an IPO.

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The Great Divide By: Siddharth Gupta (NMIMS Mumbai) The day WHO labelled the coronavirus crisis as a ‘pandemic,’ on March 13th, Indian stock markets touched their lower circuit for the first time in their brief history. Within a fortnight, the Securities and Exchange Board of India (SEBI) had to halt trading again, as the lower circuit was activated once more. Fast forward three months, which include arguably the strictest 55-day lockdown throughout the world and a rapidly rising number of diagnosed coronavirus cases, the markets have erased nearly 83% of the losses from the year’s high. Even more surprising is the fact that the US stock markets are at their highest level ever. After contracting steeply due to almost zero activity for more than a month, have the economies jumped back up on their feet, or have the investors wished the pandemic away? As it turns out, the great divide between the rich and the poor is fueling another great divide between a humbled economy and bullish markets. Moreover, historically low interest rates are partly to blame. On the face of it, these events seem to be completely unconnected.

Nevertheless, they are not!

The pandemic took the world by surprise, and most nations took preemptive steps like imposing a lockdown to build capacity and slow down the transmission. While the move ensured a lower number of fatalities due to the virus, it had an unintended impact of slamming the breaks on the wheels of the economy. The economic stress has been so acute that almost every economy has had to rely on the government’s support to get its wheels moving. In India’s case too, the government announced a massive economic stimulus, hugely dependent on the banking sector. The Reserve Bank of India (RBI), for its part, has slashed the policy repo rates by a cumulative 115 bps in two months to encourage lending. The RBI is not the only central bank to have cut the rates by such magnitude, with the central banks all across the globe taking similar measures. The net result has been a steep increase in the central bank assets (in other words, cash) all over the world (see diagram).

All this money, and nowhere to invest As the RBI pumped up the liquidity by slashing the interest rates, banks had to cut the returns they offer on their time deposits simultaneously. Seeing the declining gains on such instruments, investors considered it more rewarding to move away from these instruments, choosing equity markets instead, for good returns on investment. Data is here to corroborate the hypothesis. Retail participation in the market has seen a steep rise. The monthly average of the number of Demat account openings (which are mandatory for participation in the markets) has doubled in the period from March to June, as compared to their historical average. According to an Economic Times report, retail

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participation is at a 15-year high, at 72% (the levels last seen just a couple of years before the Great Recession).

The average daily turnover of retail investors is more than five times as much as that of institutional investors.

Moreover, while the data is representative of India, the trends are true for the entire world. The central banks all across the world, by cutting the interest rates, have pumped so much money into the system, that this money is bound to find its way to the equity markets, where the returns lie. The resultant inflow has in turn increased the asset prices (and hence, returns), making equity markets even more lucrative. What does one gather from this? Well, pretty much that it is the central banks all across the globe which are primarily fueling the stock market rally.

However, is that all? Are the markets going up just because of central banks’ generosity? Well, while this explains one side of the story, there is another side to it as well, which is just as pronounced.

The pandemic has exacerbated inequality for most nations. As a recent report by The Economist suggests, the rich have been getting richer, while the poorer have been left worse off, due to the lockdown induced economic slump. Here is how: owing to the increased uncertainty in the economy, almost everyone has been forced to cut down on their discretionary expenses. However, the more impoverished people never had high discretionary spending to begin with! As a result, it is only the rich who have saved substantial sums of money by cutting down on their costs. Even for their income, it is the poor households that are left worse off, with firms laying off semi-skilled workers engaged in mechanical work (which mostly belong to the poor households). White-collar workers (mostly belonging to the wealthier households), on the other hand, have seen little to no lay-offs, with minor pay cuts, leaving the rich primarily unaffected. This regressive trend in equality has increased the savings with the rich, while nibbling away the saving with the poor and hence, deepening the divide.

As the rich continue to save higher sums of money and accumulate more wealth, they also have more time on their hands, with many offices shifting significant proportions of their workforce to work-from-home mode.

The result of higher availability of both, money and time, has nudged these people to the equity markets, which explains the surge in retail participation. And as more and more of these households jump into the markets for higher returns (and greater thrill), the asset prices go further up, making these investors richer and hence refueling the entire cycle. The poorer households, on the other hand, are still on the same side of the spectrum, only being pushed further towards the extreme, as the stock markets reach new highs.

In no way does this suggest that the current mood of the stock markets is to be attributed to these factors entirely. An expectation of a fast recovery might be one of the primary reasons for the rally. Investors might expect some sectors to outperform the entire market, which may be driving the upward movement of the market. However, retail investor participation is undoubtedly one of the major factors behind the rally. And this investment-frenzy of the retail investors, in turn, is further exacerbated by the ever-increasing economic divide. It is the rich who get to worry about the little returns on their substantial time deposits, and it is the rich who get to accumulate even more of that money. Not for nothing did the SEBI chief, Ajay Tyagi, expressed concerns over an increased retail activity. “They do not know what they are doing,� he said.

Indeed.

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Recent Demand Slump in Indian Economy: Temporary Slowdown or Bigger Worry?

By: Kajole Agrawal & Abinash Agrawal (XIMB) Low consumption/demand leads manufacturers to adjust their output for subsequent periods. Lower production would mean a combination of more layoffs, fewer employment opportunities, and lower wages. A decrease in disposable income would mean a further reduction in consumption (multiplier effect), and the cycle repeats until the economy reaches a new equilibrium of production level.

Figure 1

*45deg line shows one-to-one relation b/w production & income DD’

Demand & Production

A C E

D

DD

B

45˚ de

The shift in demand from DD’ to DD curve, leads to reduced income corresponding to point C. The reduced income leads to further decrease in demand corresponding to point D. This continues till a new equilibrium point E is reached.

Income

The above is what the Indian economy is experiencing. Simply put, preventing the downward shift of the demand curve or even making it shift upward should help solve the problem. So let’s understand the components of the demand curve.

Demand (Z) = C + I + G (in a three-sector model); where C,I & G are consumption, investment, government spending) – Eqn 1 Further, C = a + MPC*(Y-T); where Y is the total income, T is the net tax (tax-subsidies), MPC is the marginal propensity to consume. – Eqn 2 Condition of equilibrium in the goods market would lead to Eqn 1 = Y Y = a + MPC*(Y-T) + I + G Or, Y = [1/(1-MPC)]*[ a + I + G – MPC*T) - Eqn 3 So, there are three levers to boost the GDP, 1) Investment; 2) Government expenditure; 3) Taxes

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Also, notice that any increase in investment leads to [1/(1-MPC)] times increase in GDP which is known as the multiplier. The multipliers for G & T are 1/(1-MPC) and -MPC/(1-MPC) respectively. So, if MPC is, say, 0.6, changes in government purchases would affect the income/output by 2.5 times while that in tax changes would affect it by only 1.5 times. Therefore, lowering income tax rates may not be the most efficient option, as compared to increase in government purchases/expenditure. However, consumption, which contributes 5560% of the GDP, needs to be focused at, too, which is why we will not discard the income tax option just on its efficiency.

The Finance Minister’s recent move of lowering corporate taxes may help India become globally competitive, inducing more foreign and domestic investment. More after-tax profits for corporates could lead to more investment spending and help ease liquidity crunch (more on this later), which would, in turn, increase output.

While this may be a welcome structural change, it does not cater to consumption as wages and prices are somewhat sticky and would not change much in the short run.

Figure 2 Consumer Spending

Reasons for Fall in Consumption 1. NBFC crisis → NBFC’s followed a flawed business model in which they raised short-term funds and lent for a long term creating an asset-liability mismatch. Hence, not having money to lend led to a liquidity crunch in the economy. Things became worse when IL&FS, one of the large debtors, defaulted on its repayments. All this meant NBFC’s did not have enough liquidity to lend to the commercial vehicle buyers leading to a fall in demand. Some believe consumers may be holding off their vehicle purchases until the new BS-VI compliant vehicles are available as a BS-IV compliant vehicle would now see a massive reduction in its resale value, a factor Indian consumer are overly obsessed about. That said, it is essential to note that there was no notable decrease in vehicle sales in the immediate months following the BS-VI deadline announcement in 2016. Similarly, when BS-II was rolled out in 2010, there was no significant fall in vehicle sales to speak of (see graph below). This tells us that the slump in demand may not be because of the holding off of purchases, but due to declining consumer confidence and liquidity crunch drying up credit for dealers and customers.

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Figure 3 Car Sales in India

2. Demonetisation → India, especially rural India, has always been a cash-driven economy. To rob it of its primary way of transacting was bound to render repercussions of unimagined proportions.

3. Increasing unemployment → We’re trying everything but taking active measures to create new employment opportunities, which is evident from the graph below.

Figure 4 Unemployment Rate

Relationship between MPC & Consumption → One way to increase consumption could be to increase the marginal propensity to consume (MPC).

Some usually get carried away with the multiplier effect in Eqn 3 which assumes all the government expenditure will circulate in the economy infinitely. During times of economic slowdown, people tend to save the excess money instead of using it to make purchases disallowing us to leverage the multiplier effect

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to its hilt. Therefore, it may be worthwhile to segment them into those investing in stock markets or saving more (low MPC), and those who are willing to spend (high MPC). The government should ensure that the excess expenditure they make goes in the hands of those who will use it to make purchases, not hoard or save. This way, spending can become more efficient.

Remedies & Impact The government should increase its focus on consumers. Reducing incoming tax rates/altering slabs and thresholds to increase disposable incomes for consumers should lead to more consumption.

I suggest the government takes the following actions: ✓ Take a cue from the German government, which provided subsidies for car buyers in the 2008 financial crisis. The Indian automotive industry is experiencing the biggest slump, and a similar strategy of subsidizing cars would help in the following ways: o The move would be akin to injecting liquidity as the consumer would not have to pay the full price. o The consumer purchases (although at a subsidized rate) from his savings o The automotive sector would get the much-needed boost in demand. ✓ Government purchases of final goods and services will be the most efficient method due to its high multiplier. It could not get better if these purchases were directed more towards creating employment opportunities in the rural sector and for the unemployed.

Remember, these will be the people who will purchase relatively more as compared to the high-income consumers who may already be consuming the basic minimum and would incline to save more on any increase in purchasing power. ✓ Following the above argument, it may also make sense to make income tax reforms in the lower slabs. A tax rate cut in the upper slabs may not translate much into increased consumption and would unnecessarily widen the government’s discal deficit without a commensurate effect on the economy. ✓ Guaranteeing a refund of GST credit to MSMEs within 30 days and easing pressure on the NBFCs are some great steps taken by the government to inject liquidity. It should continue to work towards improving credit flow to the consumer and industry, as that is where the root problem lies.

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✓ There is also a need to ease lending norms (though temporarily and with increased monitoring) to give out more credit to consumers, especially in rural sectors and industries.

The credit score checks should stay, but the government can work in tandem with RBI to ease other regulations like CRR, SLR, loan/deposit ratios, etc.

Targeting the root problems, like that of liquidity crunch due to the NBFC crisis and rising NPAs, should help the Finance Ministry and the government sail through.

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Trade Wars, Protectionism & Fate of Global Economy By: Akash Agrawal (IPS Academy) ‘Some wars do not need bullets & ammunition, still their intensity and impact Trad From a dispute over ‘Chronic unfair trade practices’ & ‘Intellectual property theft’ to a technology war between two economic super-giants that has implicitly threatened to rip globe apart into two pieces.

Who will win fight of technological supremacy and domination? Will countries across the globe be forced to take sides and what will be the impact of this digital divide have on the future of global economy?

Hongkong, a bustling city of over 7 million people and a gateway between China and the rest of the world.

‘The special Administrative Region’ is home to some of the busiest ports ferrying goods to and from china.

But today Hongkong has been caught in the middle of a fierce trade war between two economic giants. Like many other Asian tiger economies Hongkong is highly dependent on China for trade.

For example, Imports from china alone account for almost half of the total imports compared just 5-10 % from US. Its economic fortunes such as tourism, retail sales and real estate increasingly tied to the mainland.

However, the escalating US-china trade war has now dampened investment sentiment & consumer confidence.

The volumes are down by somewhere around 8-10% Pre-Covid period and normalcy is not expected to come anytime soon.

The United states has gained the reputation of being world’s most powerful country by virtue of its Political, Economic and Technological dominance coupled with its ability to project power on a global scale. However, the world’s second largest economy China is catching up fast. It is now not only wealthier than ever but also now technologically more advanced but militarily powerful of late.

A new cold war is brewing between these two economic behemoths. However, this time it is not a ‘war over territories’ but a ‘nationalistic battle for technological superiority and dominance’.

China’s telecommunication giant ‘Huawei’ is among a few technology companies which had caught between these two feuding economic powerhouses. It has been viewed as a national security threat by the US security agencies and banned from buying or acquiring American parts and technology.

Is Huawei a technology company or a proxy for ‘Beijing’s intrusive security apparatus’?

This is an inescapable fact that Chinese companies are required to maintain a close relationship with their home government. They are accountable to Chinese Government. On the other hand, its equally important to recognize that keeping Huawei out of American markets or banning American companies from selling components to Huawei does not necessarily make the US Fully secured against Chinese eavesdropping, spying, surveillance. Just because the supply chains are disconnected that does not means that you cannot be intervened.

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Analysts believe the matter has completely blown out of proportion. As per them, the US is targeting Huawei solely for commercial purpose. Huawei is now the largest telecom equipment producing company. It has even overtaken ‘Apple’ as the world’s second largest smartphone provider. It has also emerged as leader of new telecom technologies including ‘5g telecommunications’ seen as the next milestone in the digital revolution.

The race to install 5g mobile network reflects this growing rivalry. One that will determine political and economic fortunes of nations from many decades to come these government have.

Further adding to the fire, the US companies were ordered to not supply their parts and products to Chinese companies. Technology companies are highly required these parts as the constituent of their products.

Recently, Google has announced that it will not let support its licensed software to Chinese mobile manufactures for their upcoming flagship series. Which will result in business loss in billions.

Since China always work on self-sufficiency model, it can make and develop its own operating systems, chipset and other equipment to reduce dependency on US & other countries. Even, as per recent developments it has already started working on it.

The question arises that what impact will it have on other countries. If we talk about India, manufacturing was never our USP. We were initially known for agriculture produce which was later taken over by IT industry.

All thanks cheap intellect we are supplying to Developed nations predominantly United States from long times.

As a token of appreciation, recently the restrictions were imposed by US government on Indian H1B visas that can result in significant job loss.

Our politicians have launched numerous of schemes as if they are grandeur events, they all were fantastic on papers but failed miserably. Thanks to all those Masterstrokes that have been played by our government from time to time.

Countries like us are exploited by China and we can’t do anything because despite levying the so many duties, their product is still cheap and reliable than ours. USA is not innocent either they, take up our best minds when they require us but when we require them, we are often manipulated.

A country where development is mere a political doctrine and government never passes ‘real benefits’ to its citizens would it be wise to take products from America whose products are no doubts are outstanding, but they are expensive too.

We need them because we cannot be self-sufficient overnight. It will take time to heal the damage that has already been done. Favoring one will mean the disagreement with other. American products are out of pocket and Chinese products are presented as ‘against own nation’. We are like ‘a monkey who has been stuck in between the fight of two cats.

Ever wondered that due to all this turmoil, unintentionally we are heading towards ‘Protectionism’ which was considered as omen for the Global Business and Economy, for reason of which the concepts of liberalization and globalization were introduced.

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It Is a vicious circle that will never end. Where one country imposes some restrictions on other country and that country replicates the same with imposing country and with other countries as well.

It is a well-known fact that no country can be self-sufficient. It needs aid of other countries to grow itself. No matter how good and advanced ‘self-proclaimed beasts’ technologies are they will be requiring resources to produce their products & most importantly a market where they can export their product and services.

Same applies to countries like us also, we are at our nascent stage and we are recognizing our potentials and are working on it. We need their support whether its china or America, as they are like father figures of global economy.

The more the tensions be increasing, the more it will make people suffer because ultimately the burden of the tariffs is passed on to the consumers & they have to borne it out from their own pockets, which is already been dented. All thanks to inflation and increasing unemployment. Co-powered by COVID-19.

The Covid-19 is creating hell out of every sector and has put everyone on knees be it America, China, EU, India, Brazil or anyone. The times are tougher than ever before. It is time these giants show some modesty in global interest and reconcile their differences.

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Certainly Uncertain: Need of A Capital By: Krishnan L (IFMR GSB) At this moment we have successfully crossed 1.5 million corona cases in India. Every passing day new cases are arising and deaths are increasing and each day we are touching new peaks. We have already lost more than 35,000 Indians to this pandemic. Millions of job losses, studies, and careers of around 30 crores Indian students are uncertain. The migrant workers who moved to their villages from big cities carried the virus as well. Now the cases in the rural villages started increasing and will continue to do so because of the poor medical, housing, and infrastructure facilities in rural India. The unacceptable truth is that the actual cases and death bound to be much higher than the Government’s data. The number of tests conducted is much lower if you consider the country as a whole and unfortunately, we don’t have the required infrastructure facilities to do enough testing.

Life Vs livelihood The initial purpose of the lockdown is to control the pandemic but that did not happen even after the series of Lockdowns. This is not only happening in India; the condition is the same a around the world. On March 23, the lockdown was a decision of tradeoff between Life and Livelihood of the Indians. The Indian government decided to save a life over the livelihood of Indians. But livelihood got a huge hit. Down the line, today now because of the increasing number of cases both life and livelihood are uncertain because of the continuous lockdown and infections. The only hope for us is that the death rate in India is lower than the other countries, Because of the lower death rate the hospitals are not overcrowded now. But in case if they shout up then the fear of death will create a panic and chaos among the common man, which will again disrupt both life and livelihood.

The Great Pandemic: After three months of the lockdown being imposed, it is very evident that the economy got disturbed and it is going to be very difficult to come back to the pre-corona state. Almost all the recent estimates state that in 2020 Indian GDP will shrink more than 5% and getting a positive growth even in 2021 is also going to be challenging. It is not going to be easy for Businesses to resume their operations even after the lockdown. They will be facing cash flow issues; interest burden will hit badly to those who have higher operating leverage.

Unfortunately, those sectors are the labor-intensive manufacturing and automobile sectors. This will further lead to job losses and business closer. Moreover, the lockdown continues with few relaxations and it seems like there is no dead end in the near future.

Banks are not lending yet raisng Funds: Banks said they will raise capital by tapping the value markets or through debt instruments. HDFC Bank said on 20 June that it has gotten barricade endorsement to raise to ₹50,000 crores in the following a year by giving debt protections, while State Bank of India (SBI) said on 16 June that it intends to raise ₹20,000 crores of value capital in FY21.

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There is a flood in the number of banks and other financial institutions hitting the market for capital, yet institutional speculators are looking for extra defends, there is a great deal of vulnerability in the market and financial specialists are happy to hold up before submitting reserves. This will, in any case, not be an issue for enormous manages an account with better asset quality.

The government and RBI tried to increase the credits by continuously reducing the repo rates. But banks are not ready to provide any additional loans at this moment. It is not only because of the crisis it is also because of their NPA profile. Already in the last 2-3 years, the banks became more cautious in lending. They learned a lesson from the bad boys of India like Vijay Mallya, Nirav Modi, etc. It is also true that they don’t want to lend in this uncertain period.

Already Indian banks allotted around 13,500crs only for COVID provisions based on the moratorium amount of each bank. The amount is expected to increase further because of continuous lockdowns. Since the banks are not willing to lend money, they are depositing huge amounts of money in the safe custody of the reserve bank of India.

If the banks are not ready to lend money then why to raise capital?

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There are two main reasons to be consideredAs mentioned above the NPA might rise drastically, to handle NPA pressure all the banks need additional capital. Another potential reason is that the Economy may recover within 3-6 months once the economy started recovering there will be a need for fresh capital for the businesses. After every crisis, the economy will get a boost for the next 12-24 months to clearing the supply-demand backlogs.

When this crisis and Lockdown is going to end?

The only hope to come out of this uncertainty and economic crisis is the vaccine for the COVID -19. Until then the uncertainty, Economic Crisis, Chaos; panic will be there with us. There is around 163 vaccines are under different stages of testing. There are three vaccines in phase 3 of testing as on 20th July 2020. In the past two months, we lost trust in other human beings that we had for years. We may not have the confidence to touch or to move close to other human beings. Even after getting the vaccine for COVID, it is going to be difficult to gain trust back. But it is also true that India was a dominant player in the Pharma Industry for years.

India has better Production facilities than many of the developed nations in the world. So now the key is to get the vaccine, if that happens, we will be able to deliver the vaccine to the entire world as Microsoft Co-founder Bill Gates rightly said.

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TReDS – An alternative source of finance for Micro, Small & Medium Enterprises in India By: Nishant Nair (SIBM Pune) Small & Medium Enterprises in India are governed by a specific act named ‘Micro, Small and Medium Enterprises Development Act, 2006’. The Act introduced provisions to mitigate the problem of late payment to such enterprises. Section 16 provides that if the buyer fails to make the payment to the seller within a period of 45 days, then the buyer will be liable to pay compound interest at three times the bank rate notified by RBI. One of the objectives of this act was to ensure that such enterprises (also known as MSME’s) did not have to face issues of liquidity blocked in bills receivables. However, the reality on the ground is that MSME’s are very fearful of losing business by entering into litigation with their customers. Due to this reason, the purpose of the Act was not achieved.

According to a report published by International Finance Corporation in 2012[2], an estimated 22 percent of all finance demand by the MSME segment is met by the formal sector. Out of this, scheduled commercial bank account for 92 per cent of the formal debt flow.[2] The overwhelming representation of banks in the supply of formal credit to the MSME sector has created constraints to business expansion and growth prospects of MSME’s.

In order to address this issue, RBI had published a Concept Paper on Trade Receivables and Credit Exchange for Financing of Micro, Small and Medium Enterprises in March 2014.[3] Subsequently, after public comments received on the concept paper and interactions held with necessary stakeholders, necessary guidelines were issued in December 2014.[4] According to the abovementioned guidelines, Trade Receivables Discounting System (TReDS) is an institutional mechanism for financing MSME’s through discounting of both invoices and bills of exchange.

Using this mechanism, an MSME can get its bills receivables converted into cash quickly without waiting for the customer to make the payment. This reduces the working capital requirement and allows them to avail funds at cheaper rates. Another notable feature is that the seller is not required to put up any collateral in order to access the TReDS platform. All transactions processed on the platform are ‘without recourse’ which means that any risk of default is borne by the financier.[4] In order to understand TReDS, we need to understand the parties in the system. They comprise of buyers, sellers and financiers. Sellers are the MSME units who have sold goods or provided services on credit. Buyers are the units who have purchased goods or services from the MSME. Financiers are organizations like banks and NBFC’s who issue a bid in order to finance the seller. There are 2 types of transactions facilitated by TReDS – factoring and reverse factoring. In factoring, the seller initiates the process of financing of trade receivables and generally bears the interest cost. In reverse factoring, the buyer initiates the process of financing of trade receivables. The buyer may or may not bear the interest cost. It is pertinent to note that reverse factoring is still rare.

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The procedure followed in the TReDS system is as follows: → The seller raises the invoice against the buyer → The seller uploads the invoice on the platform and it is approved by the buyer on the same. → After validation by the buyer, the invoice is converted into a standard instrument called as a ‘Factoring Unit’. → The Factoring Unit is put up for auction on the platform → Financier makes the bids and the seller accepts the best bid → Once the supplier accepts the bid, the payment is processed on T+1 day, where T is the date of the transaction → On due date of invoice, the discounting portal collects the proceeds from the buyer and repays the financier who financed the invoice Below diagram shows how the TReDS system works. Source: RBI Concept Paper

Currently, there are 3 TReDS platforms in India who possess a valid license issued by RBI.[5] They are :– 1) Receivables Exchange of India Ltd (RXIL), a joint venture between Small Industries Development Bank of India (SIDBI) and National Stock Exchange of India (NSE);

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2) Invoicemart, a platform promoted by A Treds Ltd (a Joint venture of Axis Bank and mjunction services); and 3) M1Xchange, a platform promoted by Mynd Solutions Pvt Ltd While the benefits of TReDS are apparent and manifold, it has only been a few years since the TReDS platforms started to operate in India. In this short time span, the platforms have seen tremendous growth.

According to a report published in The Hindu Business Line, the CEO of one of the platforms expects all the three platforms to do aggregate business worth Rs. 25,000 to Rs. 30,000 crores in FY 2019-20 alone.

The Ministry of Micro, Small and Medium Enterprises came out with a notification[6] S.O. 5621(E) dated 02/11/2018 that mandated all companies with a turnover of more than Rs. 500 crore and all Central Public Sector Enterprises to mandatorily register themselves on a TReDS platform. This move helped to broaden the reach of TReDS. It is pertinent to discuss the problems faced by the MSME’s in leveraging the full potential of the TReDS system. Some of them are as follows: → Defaults made by the buyers in repaying invoices leads to losses for the financier and impacts the credit rating of the buyer. Hence, buyers can be reluctant to approve invoices on the TReDS platforms. → Many buyers are not even registered on the platforms, so MSME sellers cannot avail of the benefits of TReDS. Such buyers include non-corporate buyers and corporates with turnover less than Rs. 500 crore. → There is a lack of awareness among the MSME about the TReDS platforms and the benefits of using them to avail finance. → Fake bills can be created by the seller in collusion with the buyer. The KYC requirements verify the credentials of both the parties, but the system is not entirely foolproof as it is yet to be linked to GSTN database. → Not all banks/NBFC’s are registered as financiers on the platforms. Fewer players in the auction results in less competitive bids.

Some recommendations to tackle the above mentioned problems are as follows :→ Awareness drives can be conducted in cooperation with institutions like FICCI, CII, ICAI in order to create awareness among the MSME’s about the benefits of TReDS platform. → Link the invoices in the TReDS platform to the GSTN database in order to verify genuine invoices and create an additional layer of security. → RBI or Government should encourage participation by more banks and NBFC’s. While advances under TReDS is covered under priority sector lending, RBI can nudge banks who have not availed of the opportunities presented by TReDS to register themselves.

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In the future, it is expected that as awareness increases about TReDS and more MSME’s register themselves with the platforms, the quality of invoices auctioned on the platforms will improve and confidence in the system will increase among participants. Not only will MSME’s reach their full potential, but they will also become a vibrant creator of jobs in the country!

◼ The author is a Chartered Accountant and a first-year MBA student at Symbiosis Institute of Business Management, Pune

References :

1. http://legislative.gov.in/actsofparliamentfromtheyear/micro-small-and-mediumenterprises-development-act-2006 2. https://www.ifc.org/wps/wcm/connect/cb7b428f-57c0-4941-b760505052b12e93/MSME+Report-03-01-2013.pdf?MOD=AJPERES&CVID=jQUTnU3 Page 50, Page 53 3. https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=2804 4. https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=2904 5. https://webcache.googleusercontent.com/search?q=cache:RrF6Kqdo_XsJ:https://www. thehindubusinessline.com/companies/treds-platform-charts-explosivegrowth/article27119220.ece+&cd=18&hl=en&ct=clnk&gl=in 6. http://dcmsme.gov.in/publications/circulars/Notification1.pdf

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Youth Unemployment in India: A Grave Concern By: Saloni Subhra (Jaipuria Institute of Management, Noida) Unemployment in India remains a major cause for concern. Even before Covid-19, India’s unemployment rate had been on the rise. This can be attributed to the lack of proper skill training and the rapid increase in population. According to Periodic Labour Force Survey (PLFS) conducted by National Sample Survey Office in 2017-18, India’s unemployment level has reached a 45-year high of 6.1% with the unemployment rate being 5.3% for rural and 7.8% for urban India.

Unemployment sceneario in youth of India While the rise in the unemployment rate in India is a cause for concern what is even more concerning is the unemployment rate of the youth in India. According to the National Youth Policy of India (2014), Youth can be defined as a person who falls in the age group of 15-29 years and the rate of employment is highest in this demography.

Reports by World Bank show that the unemployment rate of Indian Youth has been increasing over the years and has shown a high rate of 23.34% in 2019.

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Even the quarterly statistical profile of unemployment in India done by the Centre for Monitoring Indian Economy (CMIE) shows that the highest unemployment is shown in the age group of 24-29 years and while there are external factors that affect employment at that age, this age group has always been most effected where employment is concerned.

According to the annual PLFS report 2017-2018, the unemployment rate of those who fall in the 15-29 age group is higher than the national average. Even amongst the youth, the rate of unemployment is higher in urban as compared to rural youth. Reports have also shown concerning level of unemployment in the educated youth of today. The higher your education is, the higher is the rate of unemployment.

Impact of Coronavirus on unemployment in Youth In January 2020, India saw the first case of the coronavirus and by March, the number of cases had risen. As a response to the growing number of cases, the Government initiated a lockdown on 24th March,2020. The

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lockdown delivered a severe blow to the economy. Ours is a consumption-based economy. Higher consumption creates higher demand which in turn increases production which then increases employment. But this long-drawn lockdown caused economic activity to shrink to the lowest of levels, raising unemployment in India.

According to a study by the International Labour Organization, the novel coronavirus crisis has disproportionately affected young people and has impacted their career options and work opportunities. Centre for Monitoring Indian Economy (CMIE) states that 27 million youth in the age group of 20-30 years lost their jobs in April 2020 and the unemployment rate reached peak level and it will have serious long term repercussions as youngsters will have to compete with newer people joining the labour force for a limited number of jobs. While the unemployment rate has fallen amidst the “unlock down� phase as economic activities are restored, the numbers continue to show a grim reality for the urban youth. Even though rural unemployment has seen some reprieve because of MGNREGA (Mahatma Gandhi Nation Rural Employee Guarantee Scheme) and sowing activities, urban unemployment continues to be at a very high level.

IMPACT OF UNEMPLOYMENT India continues to face the problem of unemployment despite several measures introduced to curb it and it has had a negative impact on both the economy and mental health of the youngsters. One of the major reasons for unemployment among youth is the lack of proper skill training. Because of this, the youth are ill-prepared for jobs and employment is low which affects the economic growth of the country. High unemployment can reduce the purchasing power of customers and the GDP of the economy. This also causes a fall in tax revenue because fewer people are paying taxes. It also increases poverty in the country as poverty and unemployment go hand in hand. Unemployment also leads to an increase in social problems as places with higher unemployment have more crime thus leading to social unrest. Apart from its impact on society, unemployment also has some bad effects on the mental health of the individual. It could lead to depression and decreased selfesteem.

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MEASURES TO CURB UNEMPLOYMENT Unemployment is a direct offshoot of cessation of economic activity. So, to control unemployment, economic activity needs to be increased. At the same time, self-employment should also be promoted. The need of the hour is to act on both this front. However, economic activity will take time to operate to full. It is a long-term objective whereas self-employment can be promoted within a short time. Another area that needs attention when it comes to curbing unemployment is bridging the gap between skill demand and skill supply. The youth of today should be provided adequate vocational training so that they are can get better employment opportunities.

CONCLUSION India can afford to ignore the issues of youth unemployment at its own peril. If youth energy and innovation are not harnessed to the full, if youth power is allowed to be frittered away, the benefits of the demographic dividend cannot be reaped and our dream of becoming an economic superpower may prove to be elusive.

It is heartening to note that the Government of India has exhibited its concern and awareness on all the related fronts and many schemes have been operationalized. Make in India, Startup India, Stand- Up India, Skill India, Atmanirbhar Bharat are steps in the right direction. National Education Policy has been formulated with a view of skill formation among future generations so that India of tomorrow, because of full utilisation of youth power may be superior to India of today.

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Effect of COVID-19 on Gig Workers By: Tejaswini GB (SRCC)

Ever wondered what a gig actually is? Ahh…maybe what you’re thinking is right. But I would suggest you to think from a business perspective. There is whole lot, in fact an economy, surrounding the word “GIG”.

That’s absolutely right if you are referring to the Gig Economy.

Gig economy has numerous names but before we look into that, let’s understand the scope of Gig Workers.

Who are these Gig Workers and why are they called so?

A hypothetical (yet real) situation, you are currently in a 9-5 job in a global management consulting firm that earns you pretty well every month. But quite often, we know that most of the employees have to spend extra hours in office or even back home in any job and yours is no exception. This makes you feel monotonous and lose out on work-life balance. But, wait you have other skills that can back you in case you decide to quit and opt-for a more FLEXIBLE, CONVENIENT, TEMPORARY and ON-DEMAND JOB. If you choose to go for this option, then voila, you are a Gig Worker. You will have the option to decide your own pay-structure according to your level of sophistication and to choose your employer/client. Isn’t this cool in a hasty world where you can’t even afford for me-time!

The word GIG comes from its traditional attribution to a short live performance by a musician or a band.

Hence, the name Gig depicting their characteristics of short, on-demand, skill-based job. Gig Workers include independent contractors, freelancers, online platform workers, contract-firm workers, on-call workers and temporary workers. Look around, you might find many including the urban clap beauticians, taxi drivers of Uber & Ola, courier delivery executives, amongst others.

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Gig economy? Sharing Economy? Platform Economy? Collaborative Economy?

While there are several names given to it, the most common nomenclature is Gig Economy and you know why it is called so. Let’s explore the reasons behind the other names.

From the Swiggy order that you place to meet your exotic cravings or the Ola ride that you take to reach your destination, are all examples of the Sharing Economy. The simple prognosis behind it is that it works on a peer to peer basis, connecting the consumers who are both the seekers and providers of a certain service or product.

In literal sense, it works on an online PLATFORM where you will find people who are ready to SHARE the excess of a room space in case of Airbnb, COLLABORATING with the respective aggregators like Uber, Swiggy, Airbnb, etc. in their respective industries to provide the same for the seekers. Hence, the name Sharing Economy and Collaborative Economy. Since most of the gigs take place on an online platform like Swiggy and Uber through their respective web applications and browsers, this drives the name Platform Economy.

Boon or Bane?!

So far, we’ve focused on the benefits that gig workers have. In fact, the employers benefit too in the form of cost-cutting as it would be costly for a company to hire a full-time worker with all the employee benefits it would have to provide according to the law of the land. No doubt that it is a Boon as 70% of Employers say gig workers increase profitability and efficiency of the organization. This has a potential to even replace the C-Suite of the business given the requisite knowledge. It is a Boon to the gig workers as well, as the demand for customer services is rapidly increasing with the aid of the technology enabling them to reach out to seekers locally and globally. This might seem too optimistic until the question of RESPONSIBILITY knocks.

COVID-19 is a BLESSING in Disguise!

Wait! I say this because COVID-19 has literally lifted the veil surrounding the Gig Economy. It might sound a bit crazy to point out Covid as a blessing when numerous gig workers across the world are directly exposed to the pandemic both physically and financially. This pandemic has raised questions to the platforms and corporates hosting gig workers who have been overlooking the health aspect of them. Gig Workers are not entitled to any form of employee-benefits including sick pay, health insurance, etc. as they are considered to be “Independent contractors”.

Across the world, the question of responsibility for the health of gig workers have been raised by the media which has been highlighted during this pandemic. Let’s look at the some countries.

Brazil Flourish Ventures recently released a country specific survey on Brazil titled “The Digital Hustle: Gig Worker Financial Lives Under Pressure”. Results prove that most of the gig workers suffer financially as 53% are cutting expenses while 50% are using savings. 51% have said that they would be able to cover their living expenses without borrowing not more than a week. Over two-thirds of Brazilian gig workers now earn less

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than $200 (Rs 1000) per month, compared to less than 10% before the pandemic—an 8x increase. They have started adapting by shifting to delivery and sales based gigs from e-hailing and other non-essential gigs. This pandemic has deepened the tradeoff between health and earnings.

South African Countries (Kenya) No insurance, No savings, No safety net with constant increase in price of food and basic medicines is the situation in most African countries including Kenya, Ghana and Nigeria. People in the nascent gig economy are not even aware about the schemes introduced by Uber. Many Platform providers have taken initiatives like crowd funding to help the gig workers or providing training and education during these tough times but all these seem to be futile leading to depleting resources of gig workers.

79% of gig workers now earn less than R 4000 ($240 USD) per month, compared to 16% before the COVID-19 lockdown shows the Flourish ventures Survey. 82% of e-hailing drivers and 57% of delivery workers suffered a large decreased in income.

80% respondents did not prioritize health as a top concern and they are cutting down on meals.

Car-hailing companies Uber and Bolt has also been affected due to curfew imposed in Nairobi Area. Another survey by Mercy Corps reveal that workers are adopting negative coping mechanisms, including taking expensive debt, selling household items, delaying or skipping rent and borrowing food and utilities.

Canada According to a Survey concluded by Statcan Covid-19, Gig workers constituted 8-10% of all Canadian Workforce in the year 2016. The study also highlights that there is no formal employment data available to assess the gig workers’ stance. More than half of the Gig workers are ineligible for regular Employment

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Insurance benefits and few others do not meet the criteria to be eligible for special EI benefits for selfemployed people.

The above chart depicts that 19.0% of male and 17.4% of female Gig workers provided professional, scientific and technical services which can be continued even in these tough times. But other industries like Transportation; arts, entertainment and recreation; Retail have come to a standstill affecting a cumulatively large no. of gig workers.

India Prior to the COVID-19 pandemic, a report by industry body ASSOCHAM had estimated the gig economy in India to grow to reach around $455 billion by 2023. Gig Platforms have pivoted or adapted to the current pandemic in some way or the other in India. Uber partnered with Flipkart and Big Basket to provide essential good delivery while Ola agreed to give 500 vehicles to Government of Karnataka for carrying doctors and other Covid related activities. Zomato partnered with Hyatt shifting it to a B2B model temporarily to pass through the crisis. As per reports, the share of the gig economy in the Indian services

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sector is close to 25% and set to grow at a rapid pace post-pandemic.

Better World is waiting….

With companies trying to shift the responsibility to governments and governments trying to shift it back to the Gig Workers in terms of adding to the existing financial risks; COVID has undoubtedly leveraged the debate and to a certain extent, provided solutions to this concern.

US including the Gig Workers in their recent CARES Act; International Labor Organization’s Guidelines and Fairwork’s Principles have all contributed to an initial stage of inclusion of gig workers to the formal sector. From Lyft providing PPE’s to its users to Ola setting up Funds and providing micro-loans, this Pandemic adds to a better world in terms of Humanity, Technology and Innovation to the GIG ECONOMY!

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India’s Journey to a Global Manufacturing Hub By: V M Hema (NMIMS Mumabi) India’s transition from an agriculture-based economy to a service-based economy, bypassing the manufacturing phase has always been looked upon as an aberration in the typical journey of an economy.

While all its peers have seen a monumental increase in the contribution of manufacturing sector to GDP before embracing their service sector, the Indian manufacturing sector’s contribution to GDP has continued to remain at an average rate of 15% - 17% even as the GDP grew almost 12 times from $ 284 billion in 1990 to $ 3.2 trillion in 2020.

Why is Manufacturing important at all for an Economy?

The answer is ‘scale’. While the service sector did enable India to reach unprecedented levels of growth, it did not have the capacity and wherewithal to employ the growing working-age population of the country.

Service sector requires specific skill sets which may not be feasible to acquire for a majority of the population.

The manufacturing sector, though characterised by low wages, would ensure a broad-based development of an economy thereby increasing the size of the pie. This increased pie would not only satisfy the domestic demand but also contribute towards growth of exports. This is precisely the ‘Atmanirbhar’ rhetoric of the current government.

The elusive Manufacturing sector growth:

Over the last few years, India started to embrace manufacturing. The government initiatives like ‘Make in India’, reduction in corporate tax rates, introduction of GST, improving Ease of Doing Business rankings had sent positive signals of a potential rise in manufacturing activity. However, these measures seldom translated into any tangible improvement in the performance of the sector. The contribution of the sector to the overall GDP has rather gone down post the initiatives (Figure 1). The growth rate also dwindled down from a high of 13% in 2015 to 6.9% in 2019.

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Figure 1: Contribution of Manufacturing sector to GDP (in percentage)

Source: World Bank

With the global supply chain pivoting away from China, the long-standing manufacturing hub of the world, India stares at a watershed moment in its entire history. This opportunity, if utilised smartly has the potential to transform India into a global factory. Our failure to revive the sector in the recent past, necessitates us to examine the various structural factors which ails the sector and the economy as a whole, so that we are better placed to dethrone the ‘Dragon’.

The changing landscape of Manufacturing sector: While we know that India missed the ‘manufacturing’ bus in the 1990s, it is surprising to note that even after 30 years manufacturing failed to take off. The multiple attempts over the years which failed to stimulate the sector indicate that there were certain structural aspects which were either unresolved or not resolved to the extent required to accelerate the growth of manufacturing.

However, in the past couple of years there have been some green shoots which show that the structural issues plaguing the sector have been identified and measures are being taken to address these bottlenecks.

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Infrastructure:

Manufacturing requires immense infrastructural support in the form of good roads, railway lines, ports, warehouses and other logistics support. This would improve the efficiency of the supply chain and ensure cost competitiveness for the manufacturers. Logistics cost in India accounts for 13% - 17% of GDP which is double the logistics cost to GDP ratio in developed countries. With rail networks being over saturated and very little improvement in the track infrastructure, almost 60% of cargo movement is via roads in India. At

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the end of 2015, only 10% of total road network was motorable in India. Inadequate warehousing facilities was also another pain point which was long ignored by the government.

However, the logistics scene has been improving in the recent years. The Bhartmala project aims to bridge infrastructure gaps through development of Economic Corridors, Inter Corridors and Feeder Routes, logistics parks, coastal and port connectivity roads etc. However, India has to leverage its air cargo capabilities and provide supporting infrastructure to increase the air cargo capacity to make the supply chain more efficient. The warehousing industry has also evolved from having many fragmented players to few large players providing value-added services with automated operations. This would reduce the inventory carrying cost for the manufacturers.

•

Skilled labour

As of 2015, India had the lowest labour productivity levels of $ 6.46 at PPP, amongst all the emerging economies. This was despite a working age population constituting almost 65% of the total population. This was because of unavailability of skilled labour. Much like our infrastructure domain, we failed to take care of our ‘human capital’ during the 1990s. This propelled the entire manufacturing scene towards China which proactively focussed on skilling its labour force thereby well placed to capitalise on the opportunity.

The government has developed a ‘Skill development’ ecosystem over the last few years including a fund (NSDF), a governing body (NSDC), a framework (NSQF), a ministry (MSDE) and skill development missions. National Council for Vocational Training (NCVT) was also established to encourage more participation in vocational courses. Yet, these initiatives did not yield the desired results. There is a need to look up to the China model of skilling labour, wherein the students were incentivised to adopt vocational training. The new National Education Policy, shows some promise in this area with increased focus on skill development and flexibility to pursue vocational courses.

Another issue plaguing the manufacturing sector on the labour front are the rigid labour laws. They have acted as a dampener for the manufacturing sector for a long time in India due the complexity and the sheer number of compliances. As the government embarks on simplifying its labour laws into 4 simple codes, it also has to ensure that the rights of the workers are not compromised in the process of making it easy for the business.

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Policies:

While the country has had Industrial policies since 1948, they have been plagued by various issues. Though the initial policies sought to protect public sector industries and discouraged private investment, the latter policies were more capitalist in nature and liberalised the sector. However, they failed to boost manufacturing mainly because of bureaucratic red-tape, corruption and political interferences.

Over the years, the landscape has become more conducive with measures taken to reduce the burden on the manufacturers. This was evident in the improvement of Ease of Doing Business ranking of India. The new Industrial policy aims to smoothen this process further by encouraging more sector specific strategy. This is

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already being implemented via the Production Link Incentive scheme proposed for the electronics sector which is planned to be extended to other sectors as well. The policy also encourages adoption of technology like IoT and automation to make the manufacturing environment more supportive and welcoming to both domestic and foreign companies.

The road ahead: India has come a long way in the manufacturing scene since its Independence. As India embarks on an epic journey to transform itself into a global manufacturing hub, it also has to pay attention to the various changes happening around it along with the above structural changes. The monumental rise in technological advancements, the rise of other emerging economies like Thailand, Vietnam and Indonesia who are equally better positioned to capture the manufacturing market should also be considered as part of its journey in order to emerge as the go-to country for manufacturing.

References: https://content.knightfrank.com/research/677/documents/en/india-warehousing-and-logisticsindia-warehousing-market-report-2018-5326.pdf https://www.prnewswire.com/news-releases/the-logistics-market-in-india-2020---growthopportunities-latest-government-regulations-key-start-ups-major-challenges-disruptiveinnovations-301034835.html https://www.india.gov.in/spotlight/bharatmala-pariyojana-stepping-stone-towards-new-india http://globalbizresearch.org/files/6029_irrem_s-ramachandran-mayur-s-nakhava-kumar-pratik141856.pdf https://www.tandfonline.com/doi/full/10.1080/14480220.2019.1639294 https://www.newindianexpress.com/business/2019/may/26/nda-20-to-roll-out-brand-newindustrial-policy-soon-1981856.html

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Impact of Fiscal Government Policy for MSME on Economy By: Yashraj Agrawal & Nikhil Kumar (TAPMI) The Micro, Small and Medium Enterprise (MSME) sector is one of the strongest pillars for our Indian economy. The main objective of MSMEs is to create a wide job opportunity of skilled and unskilled laborers. It is the second largest sector to provide employment after agriculture in India. The sector contributes around 29.7% to our GDP and 48% to the total exports of the country. Currently there are 56 million MSME in India providing employment to approximately 124 million people. Out of these, 14% of the enterprises are led by women and 60% of them are rural based. Due to this high contribution and significance to the Indian economy, the sector is also called as the growth engine of the nation.

MSME - Sambandh Scheme - Impact on Demand To support the MSME sector, Government launched the MSME - Sambandh Scheme in 2017 The objective of this scheme is to promote and develop the MSME Sector by the Central Government Ministries, Departments and Central Public Sector Enterprises (CPSEs).

Ministry of Petroleum and Natural Gas is the biggest procurer from the MSEs with 60% of the procurements followed by Ministry of Heavy Industries and Public Enterprises with an average of 15%.

Initially the Central Public Sector Undertaking (CPSUs) units were mandated to procure 20% of their annual targets from MSE Sector. In FY19 the mandated procurement was increased to 25% of the annual target. Further, to promote inclusive growth across the country, CPSUs were mandated to procure 3% out of the 25% mandatory procurement from Women Entrepreneurs.

Top 10 CPSEs Contributors to MSE Procurements Atomic Energy Mines Chemicals and Fertilizers C o a l R 0 % 2019

20 % 2018 2017

40 %

60 %

80 %

Also, 4% needs to be procured from enterprises owned by SC/ST entrepreneurs. Registered MSMEs do not need to pay tender fees and are also exempted from paying the earnest money.

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Impact on Employment To boost the MSME sector the Government of India has approved a credit linked subsidy programme known as Prime Minister’s Employment Generation Programme (PMEGP). This scheme is a merger of two prior schemes: Prime Minister’s Rojgar Yojana (PMRY) and Rural Employment Generation Programme (REGP) and was done in 2008-09. The primary objective of this programme is to generate employment opportunities in the MSME sector is both rural and urban area. The Scheme was implemented by Khadi and Village Industries Commission (KVIC), as the single nodal agency at the National level.

The budget allocation has been increasing over the years. This is because the government realises the importance of the sector and has been pushing it to generate a GDP contribution of 50% from the current level of 30%.

(Source: Annual Report of MSME Sector)

Empirical Analysis Prime Minister Employment Generation Scheme has a significant impact on the economy and has been relevant for MSME sector. As per the multiple regression model, it has been observed that over the years, one crores (in rupees) spent under Prime Minister’s Employment Generation Programme has been able to reduce the unemployment by 0.0000082% of the country. Moreover, one percent increase in inflation has reduced unemployment by 0.03834%.

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Based on these observations, the government can make changes in fiscal and monetary policies to reduce unemployment. This can be done by increasing money supply under monetary policy to boost inflation and funding required under the Prime Minister’s Employment Generation Programme to reduce unemployment.

Credit Guarantee Trust Fund for MSE - Impact on Supply Credit Guarantee Trust Fund for MSEs (CGTMSE) - Provision of collateral free credit for MSMEs Independent variables inflation and Amount of guarantee are statistically significant with the GDP of the country. The scheme focuses on giving the Micro and Small Enterprise credit facilities through MLIs and also supports guarantee facility through the Trust. The scheme aims to remove barriers and provides the MSE sector with required loan support to stimulate production and delivery of services. The entire support is done with the help of MLIs (member lending Institutions) and the trust as a whole, wherein the MLIs provide credit facilities and can also demand collateral from the borrower.

The Trust provides the facility of guarantee in case of default up to 50/75/80/85 percent of the total amount.

Every eligible borrower can avail up to INR 200 Lakh in term of Funds or Non-funds instruments like Letter of credit, Bank Guarantee, etc. It is under the “Hybrid Security” product wherein the MLIs can demand collateral from the borrower for partial amount sanctioned to the borrower. The scheme aims to provide the stimulus to supply side factors for the MSE sector. The graph shows the Year wise total guarantee approved amount under this scheme from 2001 till 2019. The total amount of loan approved are higher than the total guarantees given because there is a maximum amount that can be guaranteed per borrower but no on the amount to be sanctioned.

(Source: Annual Report of MSME Sector)

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Empirical Analysis CGTMSE Scheme has a significant impact on the GDP growth rate of the economy and has been relevant for MSME sectors. As per the multiple regression model, it has been observed that over the years, one crores (in crores) spent under CGTMSE Scheme has been able to reduce the GDP by 0.0000012% of the country.

Moreover, one percent increase in inflation has reduced GDP by -0.3332%.

Based on these observations, the government can make changes in fiscal and monetary policies to increase GDP. This can be done by reducing the money supply under monetary policy to boost inflation and funding required under the CGTMSE Scheme to increase GDP. Conclusion Government has carefully planned to increase the contribution of MSME sector following a top down approach. Government has increased the demand MSME - Sambandh Scheme, reduced unemployment through PMEGP and increase supply through CGTMSE. Based on the research, it can be concluded that the contribution from these schemes has led the government to make policy changes in monetary and fiscal policy to manage inflation, reduce unemployment and increase the overall GDP to achieve the set targets.

Reference • • •

https://www.dcmsme.gov.in/schemes/sccrguarn.htm https://fred.stlouisfed.org/series/INTDSRINM193N https://content.sciendo.com/configurable/contentpage/journals$002fcer$002f20$0 02f2$002farticle-p35.xml

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https://www.business-standard.com/article/news-cm/msmes-contribute-29-7-of-india-sgdp-119120200888_1.html

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